15% for retirement

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15% for retirement

Postby stemikger » Mon Jul 15, 2013 4:33 pm

When I first started saving for retirement, the magic number seemed to be 10%. My views changed on that after reading The Automatic Millionaire which encouraged me to max out 401K options which I have been doing 95% of the time.

In The Total Money Makeover Dave Ramsey recommends 15%.

The reason why I'm asking is because my home is starting to need repairs and I don't want to borrow money to do them. However, after maxing out my 401K ($17,500), I don't have all that much left over to save for the repairs.
By maxing out my 401K I can still save anywhere from $800 to $1,000. By brining it down to 10 or 15% I can save anywhere from $1,800 to $2,000 per month.

What would you do?

Thanks.
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Re: 15% for retirement

Postby Day9 » Mon Jul 15, 2013 4:50 pm

Assumptions: You work from 25-65, for 40 years. Your balanced portfolio returns 6% CAGR. You use a 4% Safe Withdrawl rate. Your income does not change throughout your career (for simplicity's sake)

If you make the assumptions above then you will be able to have the same income in retirement as you do when you are working if you contribute 15% each year.

For example if you make $100,000. You contribute $15,000 per year to retirement accounts. Growing at 6% , in 40 years you will have:

$2,460,715.25

When you retire you take 4% of this and withdraw that dollar amount each year. That will be: $98,428.61. Of course in 40 years $100k won't go as far, due to inflation.

I made a lot of oversimplifications and assumptions. That is why 15% is just a rule of thumb. You need to examine your own personal situation and decide if 10% will take you where you need to go.
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Re: 15% for retirement

Postby YDNAL » Mon Jul 15, 2013 4:51 pm

stemikger wrote:When I first started saving for retirement, the magic number seemed to be 10%. My views changed on that after reading The Automatic Millionaire which encouraged me to max out 401K options which I have been doing 95% of the time.

In The Total Money Makeover Dave Ramsey recommends 15%.

The reason why I'm asking is because my home is starting to need repairs and I don't want to borrow money to do them. However, after maxing out my 401K ($17,500), I don't have all that much left over to save for the repairs.
By maxing out my 401K I can still save anywhere from $800 to $1,000. By brining it down to 10 or 15% I can save anywhere from $1,800 to $2,000 per month.

What would you do?

Thanks.

I know that you are ~50 years old and already stopped/reduced 401k contributions to pay debt (house).
Link: viewtopic.php?f=2&t=53215&p=705895#p705895

No need for specific numbers, but where do you stand relative to your retirement target ?

Saving is a balancing act.
  • Early on, we have a large window to profit from compounding, but we also have goals to buy the first home, to start a family, to ____.
  • Later on, it is not terribly different.
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Re: 15% for retirement

Postby stemikger » Mon Jul 15, 2013 4:54 pm

YDNAL wrote:
stemikger wrote:When I first started saving for retirement, the magic number seemed to be 10%. My views changed on that after reading The Automatic Millionaire which encouraged me to max out 401K options which I have been doing 95% of the time.

In The Total Money Makeover Dave Ramsey recommends 15%.

The reason why I'm asking is because my home is starting to need repairs and I don't want to borrow money to do them. However, after maxing out my 401K ($17,500), I don't have all that much left over to save for the repairs.
By maxing out my 401K I can still save anywhere from $800 to $1,000. By brining it down to 10 or 15% I can save anywhere from $1,800 to $2,000 per month.

What would you do?

Thanks.

I know that you are ~50 years old and already stopped/reduced 401k contributions to pay debt (house).
Link: viewtopic.php?f=2&t=53215&p=705895#p705895

No need for specific numbers, but where do you stand relative to your retirement target ?

Saving is a balancing act.
  • Early on, we have a large window to profit from compounding, but we also have goals to buy the first home, to start a family, to ____.
  • Later on, it is not terribly different.


Thanks YDNAL. According to some of the calculators, I'm on target, but I of course, that all depends on what the market will do in the next decade. If I keep maxing out my 401K I can probably retire earlier, but if not, who knows. I did bring it down to pay off my house which I did this year. However, the house is 20 years old and needs some updating. I hate to borrow after being debt free to do that. Thanks.
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Re: 15% for retirement

Postby JupiterJones » Mon Jul 15, 2013 4:57 pm

Household maintenance is a known and necessary expenses and therefore requires some amount of regular savings. In this regard, it's no different than property taxes, a car replacement "sinking fund", etc. So I would prioritize this ahead of maxing out the 401k.

Whether you need to divert the whole $1000 or whether you can do something like split the difference (knock down the 401k by only $500, for example) depends entirely on the cost of the expected repairs and how long you have until you need to make them.

But note that I'm talking about necessary repairs, not elective repairs. These are needs, not wants. If the roof is leaking, the paint is peeling, or the doorknobs are coming off in your hand, that's necessary. If you just don't like the color of the paint, or the appliances are out-of-fashion, that's a different thing altogether. Saving for that should be prioritized with your other wants (vacations, etc.)

Incidentally, I don't think the "magic number" should really be some arbitrary percentage anyway. If you have to pick a value, 15% is as good as any. But it really depends on your retirement goals and how close you are to achieving them. It's going to be different for everyone.
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Re: 15% for retirement

Postby DiscoBunny1979 » Mon Jul 15, 2013 5:23 pm

Day9 wrote:Assumptions: You work from 25-65, for 40 years. Your balanced portfolio returns 6% CAGR. You use a 4% Safe Withdrawl rate. Your income does not change throughout your career (for simplicity's sake)

If you make the assumptions above then you will be able to have the same income in retirement as you do when you are working if you contribute 15% each year.

For example if you make $100,000. You contribute $15,000 per year to retirement accounts. Growing at 6% , in 40 years you will have:

$2,460,715.25

When you retire you take 4% of this and withdraw that dollar amount each year. That will be: $98,428.61. Of course in 40 years $100k won't go as far, due to inflation.

I made a lot of oversimplifications and assumptions. That is why 15% is just a rule of thumb. You need to examine your own personal situation and decide if 10% will take you where you need to go.


----------------------------------------------

I don't believe the average American makes $100,000 a year. I've read that the average family earns about $40,000 a year. That's it. Given that assumption, saving at 15% per year is $6,000 a year. What type of retirement would that add up to? According to bankrate.com $600K for a taxable account and about $980K for a Tax Advantaged. I think that's quite high given a 6% yearly return. My personal belief is that average family will not be saving anywhere close to $6,000 a year unless they live in a tent.


JupiterJones wrote:Household maintenance is a known and necessary expenses and therefore requires some amount of regular savings. In this regard, it's no different than property taxes, a car replacement "sinking fund", etc. So I would prioritize this ahead of maxing out the 401k.

Whether you need to divert the whole $1000 or whether you can do something like split the difference (knock down the 401k by only $500, for example) depends entirely on the cost of the expected repairs and how long you have until you need to make them.

But note that I'm talking about necessary repairs, not elective repairs. These are needs, not wants. If the roof is leaking, the paint is peeling, or the doorknobs are coming off in your hand, that's necessary. If you just don't like the color of the paint, or the appliances are out-of-fashion, that's a different thing altogether. Saving for that should be prioritized with your other wants (vacations, etc.)

Incidentally, I don't think the "magic number" should really be some arbitrary percentage anyway. If you have to pick a value, 15% is as good as any. But it really depends on your retirement goals and how close you are to achieving them. It's going to be different for everyone.


----------------------

I disagree that Household Maintenance is a known factor. For instance, Roof repair that's necessary might cost $8,000 or it could cost $30,000 depending upon the materials used. Appliances give out and have certain life expectancies. Driveways can need replacing over time - for instance an asphalt driveway cracks over time and needs recoating. It all depends upon the type of house one buys and what materials have been used that will determine cost. Air Conditioning system do not last forever but you never know when yours will give out after years of replacing 'parts'. That can be another $6,000 expense. So if you were to budget for big ticket items . . . like a new roof, new appliances, new air conditioning/heating system, new water heater, upgrading an electrical panel to add new circuits to accommodate modern needs, it can add up to a BIG chunk of change far beyond anyone's possible predictions and therefore saving for these things is a requirement, but often requires pockets larger than one anticipates - especially if everything happens at once (including a septic tank failure).
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Re: 15% for retirement

Postby JupiterJones » Tue Jul 16, 2013 3:42 pm

DiscoBunny1979 wrote:
I disagree that Household Maintenance is a known factor.


Well, to paraphrase Rumsfeld, household expenses are made up of both "known unknowns" and "unknown unknowns". :D

You can assume that the general upkeep of your house will be such-and-such a year, ballpark figure, give or take, etc. That's the sort of thing you should regularly set aside money for. The amount depends on the house, the local cost-of-living, etc. This will cover most "normal" and anticipated things.

But you're right that there can be unanticipated large expenses. The "simple" repair that uncovers something complicated and expensive. The small expenses that all conspire to occur at the same time, adding up to a big expense. This is why one should additionally have an emergency fund.
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Re: 15% for retirement

Postby Ice-9 » Tue Jul 16, 2013 4:09 pm

I just wanted to note that, a couple of years ago, Dr. Wade Pfau published a paper suggesting 16.62% was a "safe savings rate." This blog article explains it nicely and includes relevant links.

For what it's worth, I personally did just what the OP suggests. I had been contributing the max to all retirement accounts year after year, but then when a year with unusually high expenses came (in my case, both home repairs and a wedding), I temporarily lowered my savings rate to replenish my emergency fund and explored the affect on my retirement savings. After referring to a number of retirement calculators, thankfully I don't feel that lowering my savings rate even to 12% in future years would threaten my retirement. Going forward, I plan to resume contributing as much as I can to retirement accounts, while aiming for that 12% or so as a minimum during any future times I need to replenish the emergency fund following home repairs.
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Re: 15% for retirement

Postby Garco » Tue Jul 16, 2013 4:16 pm

Thanks for linking to the Pfau article on the Safe Savings Rate. I recall reading it several months ago and concluded that I was right on. The problem with it, of course, is illustrated by the OP's questions. Some extraordinary expenses may get in the way of the 16% savings for retirement. For me, I always saved at least 15% because it was mandated by my employer's 401k (my 5% matched by their 10%). I really couldn't go higher as long as I was also saving for my kids' college education. But once they both graduated, I opened up a supplemental retirement account and have been contributing another 10-15% per month; however, that's only for the past 8 years or so. It has, however, allowed me to do a bit of catch-up -- though obviously it's better to get that extra in early in one's working life than later.
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Re: 15% for retirement

Postby stemikger » Tue Jul 16, 2013 4:24 pm

Thanks for the replies. 15% is not unrealistic for me, since I was saving 26% and more for many years. I find it ironic that I'm having a little difficulty saving 26% after I paid off my mortgage. There were some years I was saving 34% which enabled me to save the max before the end of the year and it gave me some extra money for Christmas.

Between my home repairs, building a bigger emergency fund and cash flowing my daughter's college I think I will have to remain at 15% for the next few years. She is entering her second year this August. I rather save a little less so she can graduate college with no loans.
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Re: 15% for retirement

Postby ofcmetz » Wed Jul 17, 2013 4:34 pm

stemikger wrote:Thanks for the replies. 15% is not unrealistic for me, since I was saving 26% and more for many years. I find it ironic that I'm having a little difficulty saving 26% after I paid off my mortgage. There were some years I was saving 34% which enabled me to save the max before the end of the year and it gave me some extra money for Christmas.

Between my home repairs, building a bigger emergency fund and cash flowing my daughter's college I think I will have to remain at 15% for the next few years. She is entering her second year this August. I rather save a little less so she can graduate college with no loans.



I think one of the great things about saving a lot early is that it allows one to back off and help the kids with college when the time comes. I hope to be in a similar situation in 10 years.
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Re: 15% for retirement

Postby stemikger » Thu Jul 18, 2013 10:08 am

ofcmetz wrote:
stemikger wrote:Thanks for the replies. 15% is not unrealistic for me, since I was saving 26% and more for many years. I find it ironic that I'm having a little difficulty saving 26% after I paid off my mortgage. There were some years I was saving 34% which enabled me to save the max before the end of the year and it gave me some extra money for Christmas.

Between my home repairs, building a bigger emergency fund and cash flowing my daughter's college I think I will have to remain at 15% for the next few years. She is entering her second year this August. I rather save a little less so she can graduate college with no loans.



I think one of the great things about saving a lot early is that it allows one to back off and help the kids with college when the time comes. I hope to be in a similar situation in 10 years.


This is true, I didn't really look at it that way. I was too busy focusing on not putting in the max. I have been so programmed all these years. However, when college is over, I'm all in. LOL.
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Re: 15% for retirement

Postby freebeer » Thu Jul 18, 2013 10:31 am

ofcmetz wrote:I think one of the great things about saving a lot early is that it allows one to back off and help the kids with college when the time comes. I hope to be in a similar situation in 10 years.


Definitely! We are T-2 years from college for first of two (I'm early 50s, DW mid 40s). Have hit our "Number" wrt retirement savings, but designated college savings will be insufficient if both end up in expensive schools. But if one or both of them do win the Ivy League lottery, we are in a comfortable enough situation where we can decide to fund that by staying working a year or two longer or at least funnel surplus into that instead of further padding the retirement fund. It's nice to have that flexibility and have reasonable retirement already "in the bag".
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